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EC336 - TRADE > Ricardian > Flashcards

Ricardian Flashcards

1
Q

How are countries different in Ricardian?

A

Different labour productivity

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2
Q

What is the opportunity cost of good A in terms of good B?

A

The number of units of good B that have to be given up to produce an additional unit of Good A.

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3
Q

A country has a comparative advantage in good A if…

A

It has a LOWER opportunity cost if good A in terms of good B compared to another country.

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4
Q

How can we show that trade based on comparative advantage is beendifical?

A

Global production rises - can produce more goods with the same resources as each country specialising means these goods are produced more efficiently.

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5
Q

Background on David Ricardo and why he came up with the model.

A

1817
1851 Corn laws - Ricardo wanted to show that tariffs on grain imports into UK were bad
Hence he made uk look, as weak as possible and still showed Trade is beneficial.

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6
Q

What determines comparative advantage in Ricardian model?

A

Different labour productivity across countries

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7
Q

Dimensions of Ricardian model

A

2-2-1

2 countries, 2 goods, 1 FOP = labour

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8
Q

Labour mobility assumptions (2)

A
  1. Labour mobile across industries

2. Labour immobile across countries

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9
Q

Assumption about market structures

A

Perfect competition since Ricardian is a neoclassical model

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10
Q

Unit labour requirement shows…

A

How many units of labour are needed to produce 1 unit f output?

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11
Q

What do unit labour requirmenrs imply about return to scale?

A

CRS - if we want to double output, must double inputs

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12
Q

How do unit labour requirements relate to labour productivity?

A

INVERSE of productivity - lower labour unit requirements = higher productivity

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13
Q

PPF shows

A

The maximum amount f a good that can be produced for any amount f ten other good.

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14
Q

PPF equation

A

aLW Qw + aLC Qc = L

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15
Q

Slope of PPF equals

A

Opportunity cost of cloth in terms of wine

= aLC / aLW

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16
Q

Optimum production depends on (2)….

A
  1. PPF - what an economy is able to produce

2. Relative prices

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17
Q

Relative price of cloth in terms of wine =

A

PC/Pw

- the amount of wine that can be exchanged I; the market for one unit of cloth

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18
Q

Relationship between wages across industries and why

A

Ww = Wc = W

Due to labour mobility across industries —> arbitrage

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19
Q

What is MC formula?

A

MC = labour unit requirement x wage

- the wage cost to produce an extra unit of output

20
Q

2 conditions that need to be satisfied under perfect competition for an economy to produce both goods.

A
  1. Pc = aLC x Wc

2. Pw = aLW x Ww

21
Q

Optimality condition in Autarky

A

Pc/Pw = aLC/aLW

Relative price of cloth = opportunity cost of cloth

22
Q

If PC/PW > aLC/aLW an economy t will…

A

Produce cloth only

23
Q

If PC/PW < aLC/aLW an economy will…

A

Produce wine only

24
Q

Define absolute advantage

A

Absolute adv = an economy has a lower labour unit requirement in that good compared to another country’s labour unit requirement in the same good.
I,e, more efficient at producing that good.

25
Q

Is trade beneficial is one country has an absolute adv in both goodS.

A

YES - Trade us based on comparative advnateb

26
Q

What do we compare between home and foreign to determine comp adv?

A

aLC/aLW vs aLC/aLW

27
Q

What happens to relaorbr priced after trade?

A

We have ONE WORLD RELATIVE PRICE in between the 2 pre trade domestic prices. Hence relative priced equalise across countries.

28
Q

What do the shapes of world RD and RS look like?

A 
RD = we assume standard downwards sloping demand 
RS = a step function
29
Q

Production is world relative price < both opportunity costs

A

NO cloth produced - wine only.

30
Q

Production if world relative price = home opp cost, but < foreign opp cost.

A

Home indifferent between cloth and wine = produce some combo of the two.
Foreign still produces wine only.

31
Q

Production if: home opp cost < world relative price < foreign opp cost.

A

Zone of complete specialisation
- Home produces cloth only
- Foreign produces wine only
Any price between the two lead to same quantity as all resources devoted to one good in each country.

32
Q

Production if: Home opp cost < world relative price = foreign opp

A

Home specialise in cloth

Foreign indifferent between the 2

33
Q

Production if: home & foreign opp costs < world relative price

A

Home and foreign produce cloth only - NO WINE.

34
Q

The gains from trade can be either show by (2)….

A
  1. Production side gains

2. Consumption side gains

35
Q

How do we show production side gains from trade?

A

No trade: show output esch country can produce of the good it does not have a comp adv in using 1 hr labour.
Trade: show how much of comp adv good can be produce using 1 hr labour, then how much of the other good we get through trade.
Qc x Pc/Pw = Qw
Qw x Pw/Pc = Qc

36
Q

The CPF shows

A

The maximum amount of a good that can be consumed for a given amou;t of the other good.

37
Q

How do PPF and CPF relate in Autarky?

A

PPF=CPF - can only consume what u produce in aukarky.

38
Q

In what extreme case is trade NOT beneficial consumption wise?

A

If a country only wants to consume the good it has a comparative advantage in, trade —> NO expansion of CPF here

39
Q

Do we see wages equalising across countries? Why? Why not?

A

NO - w and w* NOT EQUAL

due to labour immobility across countries assumption

40
Q

W > W* IF…

A

If home has an absolute advantage in BOTH goods, it will have a higher wage. (Before & after trade)
But if neither country has an absolute adv in BOTH goods, ambiguous.

41
Q

Formula for wages under perfect competition

A

P = MC
MC = aLC x Wc
Wc = Pc/aLC
or Ww = Pw/aLW since Wc=Ww

42
Q

How does Ricardian response to myth 1 that trade is only beneficial for strong countries?

A

Trade depends on comparative, not absolute adv.

A country with an absolute disadvantage in both goods can still benefit from trade.

43
Q

How does Ricardian respond to myth 2 the Pauper labour argument?

A

Wages based on domestic labour productivity. Ricardian does not predict wage equalisation from trade. And only 1 FOP so no income inequality implications.
- But Trade enlarges CPF so purchasing power rises.

44
Q

How does Ricardian respond to myth 3 exploitation argument?

A

trade enlarges CPF and so increases purchasing power.
Denying opp to trade —> worse outcomes.
The Q is not whether they should be paid more, just whether trade makes them better or worse off.

45
Q

Does the empirical evidence support Ricardian prediction on labour productivity and wages?

A

YES - cross sectional and Time series evidenc of higher productivity = higher wages.

46
Q

Does empirical evidence support Ricardian that trade is based on differing labour productiviies?

A

YES - higher US/British productivity —> higher US/British exports

47
Q

How does adding transport costs affect the Ricardian model?

A

Transport costs —> some goods NONTRADED e.gl services like haircuts.

EC336 - TRADE (9 decks)

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